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Apple Earnings Preview: What You Need to Watch

The iPhone and China look to be big areas of interest for investors.

Apple(NASDAQ:AAPL) is scheduled to report earnings for the fourth quarter of fiscal 2015 on Tuesday, Oct. 27, after market hours. Apple is the biggest listed corporation in the world, and one of the most influential names in the tech industry, so it attracts a lot of attention from all fronts.

With this in mind, investors need to know where to look and what to expect when it releases its earnings report.

The big numbersSales are clearly a big area of focus. After all, there is a reason why revenue is the top line in the income statement. Apple is expecting revenue to be in the range of $49 billion to $51 billion in the coming release, which would imply a year-over-year increase of between 16% and 21% from the same quarter last year.

Investors need to take a deep look at the company's fundamentals from a long-term point of view as opposed to putting too much attention on Wall Street estimates and market reactions. However, it's worth noting that Wall Street analysts are on average calculating that Apple will make $51.07 billion in revenue, so expectations are moderately above the high end of the company's guidance.

According to management, gross profit margin is expected to be between 38.5% and 39.5% of revenue, up from 38% of sales in the same quarter last year. Apple's profit margins are on the rise over the last several quarters on the back of strong pricing in the iPhone segment and cost efficiencies.

The enormously important iPhoneThe iPhone accounts for more than 60% of the company's revenue, so all eyes will be focused on this very important product. The iPhone 6 model was a big success for Apple over the last year, as consumers around the world eagerly embraced the product and its enlarged screen size in comparison to previous versions.

The latest iPhone 6s and iPhone 6s Plus models reached the markets in the last days of September, so they will have a small impact on revenue during the September-ended quarter. However, Apple's revenue guidance for the quarter ending in December will depend to some extent on demand trends for the new iPhone models.

Apple announced on Sept. 28 that it sold 13 million new iPhone 6s and iPhone 6s Plus units during the initial sales weekend. This represents a 30% increase from 10 million units for the iPhone 6 and iPhone 6 Plus in the first weekend of sales last year.

A big part of this increase is probably due to the timing of the product's availability in China. The iPhone 6 was not available there during its first weekend, but the iPhone 6s was. This means that year-over-year comparisons regarding sales in the initial weekend need to be taken with a grain of salt.

Key growth driversSpeaking of China, this will be another big area of focus in the coming earnings release. Total sales in the Greater China region grew by a staggering 112% during the third quarter of fiscal 2015, reaching $13.2 billion and accounting for nearly 27% of the company's global revenue.

Economic growth in China has been decelerating lately, and investors are increasingly concerned about the possible impact of a slowdown there on Apple's financial performance, so we should expect a lot of questions about demand in this crucial market during the analyst call.

In addition, Apple is betting on new products and services with recent innovations such as Apple Pay, Apple Music, Apple Watch, and the revamped Apple TV. The company does not disclose much financial information about these segments. CEO Tim Cook has only said that Apple Watch was "off to a strong start" last quarter, and he recently confirmed during the WSJDLive 2015 conference that the company won't be providing any specific numbers for Apple Watch in the coming earnings release, either.

On the other hand, the executive announced that Apple Music has 15 million users, of which nearly 6.5 million are paying subscribers. This means that Apple is already the second industry player in music streaming behind Spotify, which has 20 million paying subscribers, so the service seems to be clearly gaining traction among consumers.

Apple's new products and services will most likely have a modest financial impact on the company's business over the coming quarters. However, performance in these growth areas is critical when evaluating Apple's ability to continue to innovate and deliver sustained growth in the years ahead.

Author

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored.
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